After Peaking in 2015, Venture Investment Activity Normalizes in 2016, According to PitchBook-NVCA Venture Monitor

Driven by uptick in billion-dollar funds, VCs record best fundraising year in a decade

SEATTLE, January 11, 2017-- 2,470 investors deployed $12.7 billion in capital to 1,736 venture-backed companies during the fourth quarter, according to the PitchBook-NVCA Venture Monitor, the definitive source of information on U.S. venture capital activity. The report found that throughout 2016 more than $69.1 billion was invested across 7,751 companies in the entrepreneurial ecosystem, representing the second highest annual investment total in the past 11 years. Given the high levels of venture investment activity recorded in 2014 and 2015, 2016 represented less of a decline and more of a return to normal for the venture capital industry.

"Fourth quarter activity reinforces what we saw and heard all year, which is that the venture investment levels are readjusting after peaking in 2015. We view this recalibration as a healthy normalization and a return to a much steadier pace of investment," said Bobby Franklin, President and CEO of NVCA. "The large amount of capital raised for deployment to the ecosystem as well as optimism surrounding the IPO pipeline are all positive signs as we look ahead. Given the 2016 election results and the venture industry's return to normal, 2017 will prove a pivotal year for venture investors and the startups they support."

"As companies stay private for longer than ever, the venture capital markets are maturing accordingly," said PitchBook founder and CEO John Gabbert. "After a couple years of frenzied investments and lofty company valuations, the venture capital ecosystem is moving away from a financing peak and returning to a normal, healthy investment climate."

Fundraising activity

Despite a decline in investment activity, 2016 recorded the highest amount of capital raised by venture funds in the last ten years. Each quarter posted historically high fundraising figures; however, the second quarter stood out with venture capital firms raising $13.6 billion. The fourth quarter recorded $7.3 billion raised, bringing the total amount of capital raised in 2016 to $41.6 billion across 253 funds.

This decade-high tally is largely the result of an uptick in the number of billion-dollar funds that came to market in 2016. In 2016 venture firms raised seven funds valued at $1 billion or more, including Andreessen Horowitz, Kleiner Perkins Caufield & Byers and Greylock Partners. While firms that have raised fresh capital will be busy putting their dollars to work across various sectors, it may prove trying for smaller funds and new managers to raise capital in 2017.

Investment activity

The $12.7 billion deployed to 1,736 venture-backed companies in the fourth quarter brought annual investment to $69.1 billion across 7,751 companies. Despite recording the second-highest amount of capital invested (second only to 2015's tally of $78.9 billion) in the last 11 years, 2016 saw a sharp decline in terms of completed financings. More than 8,000 deals were completed in 2016, representing a 22% year-over-year decline and the lowest count since 2012, a clear indication that venture investors are being much more critical of their investment opportunities.

First financings, defined as the first round of equity funding in a startup by an institutional venture investor, also took a hit in 2016, with just 2,340 companies receiving their first round of funding, amounting to $6.6 billion in total invested capital. This represented a 30% year-over-year decline and the lowest count since 2010. Just over half (50.6%) of all venture deals in 2016 were angel/seed rounds, while deals at the early and late stage accounted for 30.7% and 18.7% of total financings, respectively.

Software companies attracted the lion's share of venture investment in 2016: $33 billion was invested into the space, representing 48% of total invested capital. Artificial intelligence, robotics, drones and machine learning are all burgeoning software verticals that will likely continue to attract investor interest. Outside of software, the pharmaceutical and biotech industry continued to attract healthy levels of investment: $7.8 billion was invested in these companies in 2016, amounting to 11% of all venture investment.

Exit activity

The pace of exit activity for venture-backed companies continued to slow in the fourth quarter of 2016, with only 142 exits completed valued at $6.8 billion. Despite a slowdown in exit activity, the median exit size in 2016 reached $84.5 million, a decade high and a 30% increase from the year prior. Corporate acquisitions proved to be the most popular exit route for venture-backed companies in 2016, while the IPO window remained narrow. In the fourth quarter, seven companies went public bringing the total number of completed IPOs to 39 in 2016, the fewest since 2009, which had ten venture-backed companies debut on the U.S. exchange.

Looking forward, there are 20 venture-backed companies registered to IPO, including Snap, AppDynamics, and AppNexus signaling increased optimism in the public market. Despite this newfound optimism, it may still prove challenging for companies looking to IPO, especially those whose large valuations may not be easily supported in the public markets. A combination of high levels of cash on corporate balance sheets and the potential for a Republican-controlled Washington to reform the corporate tax code could mean that M&A activity will remain robust throughout 2017.

Download the full report here: http://reports.pitchbook.com/4q-2016-pitchbook-nvca-venture-monitor

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About National Venture Capital Association

Venture capitalists are committed to funding America's most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA) empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community's preeminent trade association, the NVCA serves as the definitive resource for venture capital data and unites its member firms through a full range of professional services. For more information about the NVCA, please visit www.nvca.org.